This instrument is one of the foreign trade financing methods. The letter of credit includes the relevant conditions (i.e.due date of freight, payment method, type and amount of the product) of an importation. By sending the letter of credit to the bank of the counterpart exporting company, the letter of credit provides a commitment on the payment of the relevant amount to the counterpart exporting company following the shipment of the goods to TRNC. In case there is a provision in the letter of credit indicating that the payment will be made after the freight is completed, this operation is referred to as a deferred letter of credit
It is a type of payment inducing high assurance both for the buyer and the seller: from the buyer’s side, there is a bank commitment for making a payment only for the goods which are in accordance with the contract conditions and freighted on due date. Otherwise, the payment is not effectuated. On the other hand, from the seller’s side, the receival of the payment is guaranteed by a bank upon the compliance with the conditions set forth in the letter of credit.